Company Liquidations likely to follow mass Tax Deferment

At the end of 2008, the Chancellor of the Exchequer announced a fast track service to allow companies to apply to defer their corporation tax bills. In order to qualify for the deferment scheme, the business must agree their requirement with HM Revenue and Customs (HMRC). If agreed, the period of deferment is normally 3 months. However, this may be extended depending on the company's individual situation.

So far, it seems that a significant number of businesses have taken advantage of the scheme. The governments figures indicate that HMRC have made agreements with one hundred and forty six thousand companies to delay the payment of their tax. This number is the equivalent of GBP2.6 billion in uncollected tax revenues.

On the face of it, the corporation tax deferment scheme seems like an extremely good idea. However, I believe it is important to question whether this policy is simply deferring an inevitable wave of company failures. There is a strong argument to suggest that it is simply hiding a deeper problem that many businesses are failing and will do so when they eventually have to pay the tax they owe when it becomes due.

Having taken advantage of the tax deferment scheme, companies should be using this breathing space to restructure their business. In other words, cost cutting exercises should be undertaken so that these businesses can trade on through the difficult economic conditions ahead. However, in many cases I do not believe that this is happening. The reality is that companies are gambling on an upturn in trade so that they will have the cash to pay the tax when it eventually becomes due.

However, we have to question whether this view is realistic. The bank of England recently agreed that an additional GBP50 billion was required to be pumped into the economy through quantitative easing. However, the banks currently show no sign of lending this money out to either business or consumers which is so desperately needed to encourage growth back to the UK.

There has been good news about the return to positive growth in France and Germany, however no one really knows when the recession in the UK and wider Europe will truly be over. Even after a return to growth, the experience of the last recession in the late 1980s / early 1990s tells us that companies will continue to struggle and many may continue to fail. This is because the businesses that are left will be leaner and meaner. Competition will be fierce, prices will remain depressed and payment terms extended. Companies which do not have the cash to ride this storm will still fail even where official figures are suggesting a return to the good times is just round the corner.

Given this situation, I would argue that the agreements currently being made by companies with HMRC to defer tax payments are unrealistic, too short termist and will need to be renegotiated. The problem is that the tax liability has not gone away. As the economy continues to struggle and company cash flow remains tight, it will come back to haunt many businesses in 6 months or so. This may lead to a surge in company failures towards the end of 2009 and into the first quarter 2010.